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The economy is shaping up to be one of the biggest issues of the presidential election. That’s not surprising considering Americans are experiencing the highest inflation cycle in four decades following a surge in the money supply due to trillions in stimulus spending during the pandemic. A recent Motley Fool survey found that 60% of respondents consider inflation as a… top financial priority at the elections.
The good news is that actual inflation is approaching the Federal Reserve’s 2% target, but prices remain high, especially in crucial sectors such as housing, where the country faces an estimated 4.5 million housing shortage. Zillowafter years of underpinning.
The stock market is often seen as an important barometer for the economy. Major indexes such as the S&P500 (SNPINDEX: ^GSPC), Nasdaq Compositeand the Dow Jones Industrial Average are reported daily by major news channels. For example, if a recession were to occur, one of the first signs would likely be a falling stock market.
After several years of uncertainty, investors are naturally wondering which candidate would be better for the economy and the stock market.
Which political party is better for the stock market?
Based on historical averages, the stock market has performed better under Democratic presidents in modern history.
Since 1957, when the S&P 500 was created, the index has produced an average compound annual growth rate (CAGR) of 7.4%, excluding dividends. Under Democratic presidents, the index has seen a CAGR of 9.8%, while the CAGR under Republican presidents has been only 6.0%.
However, the average return under Republican presidents was even higher, at 10.2%, compared to 8.9% under Democrats. Based on that data, you could argue that the stock market has been stronger under Republican presidents.
Taking the status of Congress into account yields different results. One data set going back to 1926, when the S&P had far fewer than 500 companies, showed that returns under unified Republican and Democratic administrations, that is, when Congress was controlled by the same party as the president, were virtually identical.
In the thirteen years that a Republican administration controlled the White House and both houses of Congress, the average annual return on the S&P 500 was 14.5%. During the 36 years that Washington was under Democratic control, the index returned 14.0%.
A divided Congress with a Democratic president returned 16.6% in the fifteen years that occurred, while in the 34 years with a Republican president, the S&P 500 returned only 7.3% generated.
Does the President Matter to the Stock Market?
When looking at this type of data, it’s important to remember that correlation does not equal causation. The relationship between which party controls the White House and stock market performance is tenuous.
For example, since 1957, the stock market has performed best under President Bill Clinton, when the S&P 500 rose at a compound annual rate of 15.2%. Clinton’s era benefited from the rise of the Internet and the rise of the Internet, but he left office before most of those gains were wiped out when stock prices plummeted in 2001 and 2002. If Clinton’s term had lasted another year or two, his CAGR would have been a lot. worse.
The president has little direct control over the economy or the stock market, making it much different from areas such as foreign policy, environmental policy, and Supreme Court appointments. Additionally, there is a lot of randomness and cyclicality to take into account.
While it is true that the president can influence economic policy and set the tone for the country, the American economy is dominated by the private sector. About 88% of America’s gross domestic product (GDP) comes from the private sector, and companies want to maximize their profits regardless of who is president.
The recent stock market boom, attributed to artificial intelligence (AI), is being driven by companies like Nvidia And Microsoftand it was caused by the launch of OpenAI’s ChatGPT. Stocks have soared since then, but it’s a mistake to give President Biden credit for those gains.
Moreover, the White House does not even control the key economic levers wielded by the federal government. For example, the Federal Reserve controls monetary policy through the Federal Funds Rate, and controls the money supply by buying and selling securities.
Congress, meanwhile, controls fiscal policy, such as federal tax rates and the federal budget. The president may be able to influence these institutions, but they have no direct control over them.
Why the stock market will be higher in four years
Right now, conditions look good for a long-term bull market leading up to the next presidential administration. The Federal Reserve is expected to start cutting interest rates next month. Unemployment is still relatively low at 4.3%, and inflation has finally cooled to close to the Fed’s target of 2%.
Meanwhile, new artificial intelligence technologies should continue to soar the stock market via billions in investments and new products, as companies pursue artificial general intelligence (AGI) and innovations such as self-driving cars.
As important as the upcoming elections are, it is a mistake to base your investment decisions on who ends up in the White House; the connection is not as strong as it seems.
Right now, the stock market appears poised to continue rising for the next four years regardless of who occupies the White House.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Microsoft, Nvidia, and Zillow Group. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has one disclosure policy.
Prediction: The stock market will rise regardless of who wins the 2024 election was originally published by The Motley Fool